The Supreme Court this morning issued the long-awaited rulings in 5 judgments on box 3. As in the 2021 Christmas ruling, the Supreme Court ruled that the levy on lump-sum income is contrary to treaty law if the actual return is lower. This applies to both the Bridging Act, which took effect from 2023, and the Recovery Act.
Legal recovery
The rulings do not result in no income tax being due on income from savings and investments (box 3). Taxpayers who believe that their actual return achieved in a year is lower than the flat-rate return are entitled to recovery in the form of a reduction of the tax due. The Supreme Court stressed that in doing so, it does not matter how big the difference is between the actual return and the flat-rate return. Those claiming this restoration of rights must state the facts showing that the actual return is lower than the flat-rate return and, if asked, be able to make this plausible.
We expect the Tax Administration to come up with the already announced form in the near future that will allow taxpayers to report the actual return they have achieved on their box 3 assets.
Actual return
Crucial, of course, is the answer to the question of what is meant by actual return. The Supreme Court gives a number of instructions for this in the judgments. It is obvious that the concrete interpretation of these instructions will be submitted to the tax courts.
- The taxpayer's entire assets in box 3 must be taken into account (including bank deposits), not just the return on certain assets or categories of assets. In doing so, the assets a taxpayer has in Box 3 during a year are taken into account; not just the assets on the reference date (1 January).
- Of interest is the nominal return (inflation is not taken into account).
- The negative return in a year is not taken into account in years with a positive return (within a year, positive and negative returns are however offset against each other, as the actual return is determined for the total assets in box 3).
- Return consists not only of income drawn from assets (such as interest, dividends and the like), but also of changes in value, both positive and negative and both realised and unrealised.
- No expenses are taken into account, but interest on debts belonging to Box 3 is.
If the actual return on total Box 3 assets in a year is higher than the flat rate return, obviously no more is taxed than the flat rate return.
What can (should) you do?
Nothing for now. Nor can you. This is because the tax authorities have not imposed final assessments for the years 2021 to 2023 if you declared other assets and/or debts in Box 3. Only after the final assessment is imposed, the formal legal process of objection and appeal is open.
The Inland Revenue is likely to come up with an option to report to them the actual return you made on your box 3 assets in these years. You can, of course, start collecting the information for this already. What exactly the request for information will look like from the Tax Administration is not yet known at this point. It is also not yet known how the Tax Authorities will apply in detail the instructions given by the Supreme Court regarding the determination of the actual return.
If you declared only bank deposits in box 3, the Inland Revenue did impose final assessments (see our article RB advises pro forma objection to box 3). The Supreme Court considers that the flat rate for bank deposits can be assumed to generally approximate the actual return on those deposits. With this, the chances of success of an appeal against these assessments do not seem very high.
The Supreme Court rulings cover the period from 2021 onwards. For the years 2017 to 2020, the Supreme Court has yet to consider the proceedings brought.